benhacker

I did. You can PM me. But I'm only seperate accounts, so can't help you on LP / fund setups / questions.

Very true. But when cash balances aren't real and there is no extradition, I think you probably don't conform to many rules of thumb. :)

W, I think some folks elaborated on my "liquidity" bullet which seems to get at what you are looking at. But a basic question for you... do you have *any* debt of any kind personally that has some interest cost associated with it?

W, Your question to me is very strange because of the assumption you made, but don't take that as it is dumb to ask. These basic things are often the most useful to think about from a standpoint of business. Why would you consider the cash which a corporate owns is "free"? The precise reason why you discount cash flows from the future to today to value them is because cash is most certainly *not* free. If a company has $1m and they choose not to give that immediately to shareholders... well that has a cost (to shareholders) right? We could all argue about what it is... but it's not free. Well this is a separate issue. If a company carries a bunch or debt into the future, or it decides to pay it down, I would think that the risk and magnitudes of the cash flows to owners would change, right (again, assuming identical company choosing two separate paths...)? So if you make an assumption about a company maintaining / increasing it's debt, and then paying you some level of income, that's fine. But if you believe that same business would endeavor to repay debt instead, you would have to guess the cash flows (again, to you as an owner) will be reduced right? Let me know if this is a disagreeable assumption to you. Don't confuse the way in which some folks value companies to the reality of how real companies work. Shockingly, the two are somethings not even really closely related. -- To directly answer your question -- There are a few direct reasons to why companies may borrow money, none of which are really addressed by my commentary above. In no order: 1) To increase per share / shareholder returns - Generally, if a company can borrow below it's marginal rate of investment, and it can carry that debt through and not be caught out in a downturn and forced to liquidate or repay / dilute, then it would seem adding this leverage would increase returns to equity. 2) Increase equity asymmetry / Corporate Structure leverage - Some shareholders may appreciate the capped downside (you can only lose 100%) / unlimited upside of a corporate structure where you only own equity. Leverage allows you to magnify this effect (you still only lose 100%, but can gain more via the leverage if things work out). This is arguably most common private equity management strategy. 3) Corporate borrowing rates may be lower (at the same terms) cost than individual borrowing. So it's not realistic for individuals to "tune" their leverage to their liking and having the corporation do it is better. 4) Corporations don't generally get a valuation premium for their equity if they don't use leverage, but bond investors will pay a valuation premium for contractural (debt) cash flows. Thus, the low leverage equity implied valuation is lower than the equivalent leveraged bond position. I think this is a structural inefficiency because the market for bonds and stocks are inherently different because of regulatory and psychological reasons. 5) Size - Management generally gets paid with size, so debt is a way to grow larger without tapping shareholders... so it is often done even if it doesn't make sense. 6) Fraud - High debt levels of debt generally muddy financial statements and allow for some shady activities, and also a way to transfer more $$$ in and out of the company. You will rarely see frauds in non-levered companies. 7) Kind of implied in several items above, but investing is about risk / reward, so adding / removing debt allows dynamically setting of the proper risk / reward for shareholders. Arguably there is some "optimal" point of leverage, but more realistically, there is a range that makes sense and a corporation can tune this risk / reward to what their shareholders want. In reality the overall bubbliness of the industry / market / economy sets this more an industry and individual companies tend to move in the same direction over cycles (in my experience). 8) Debt is a deductible expense. 9) Liquidity - Many companies need a cushion in the short term in case there is a business disruption of any kind or a banking system seizes, etc. Most companies for this reason always carry some minimum of cash (while also carrying debt). This isn't because the cash earns anything, but it's because the cash is needed for liquidity buffer, or something else (regulatory, relationship, psychological etc etc) I'm sure I missed some that others can throw out there.

VFIAX is 5 bps... SPY is 9 bps....

- Nope, you get a "gains" distribution which is cash, but it's 100% taxable (at whatever long term, or short term, etc). You own your tax, not the mutual fund. - Yep * I'm not sure about non-mutual funds, my commentary is only about mutual funds.

For a US mutual fund (they pay their gains as a distribution near the year end), yes, this is true. To compensate, the fund NAV is reduced by the distribution amount, so it's really just a timing issue (you could sell immediately and offset the 'gains' with losses on the sale). However, in certain cases, the timing issue and size of the distribution can be quite troubling. However, it is truly just a timing issue. It happens in your personal account too (you can have a year where your returns are negative, but your tax liability is big), it's just a timing issue in all but esoteric cases.

Paulson was / is a risk arb expert (and perhaps not a great one, but I think he was good). He lucked into a huge trade in the crisis and parlayed it like many would into a huge business investing in... well, whatever is hot... based on his notoriety. I can't say as I would blame him for this, I think many would have done the same. But looking to Paulson for anything of expertise on investing in general seems unwise. His place in the market is largely based on chance. If he has some opinion on a big risk arb, I'd probably listen.

it's too bad that this piece of Fairfax always gets the focus, but just to put some #'s. GD GDP decline was 40%. Notional portfolio of CPI puts for Fairfax is like $110B. So... yes, Petec is right. the gains on the swaps would cover not just the EQUITY portfolio, the gains would cover a wipeout of the equity & fixed income portfolio.... or really, a zeroing out of 100% of Fairfax assets. Again, this doesn't defend Fairfax's stance, or how they frame their letters to shareholders which I think deserve some valid critiques, but arguing against a bar bell portfolio by claiming extreme outcomes will kill it without actually running some basic numbers is probably not the way to critique FFH. The size of their CPI bet appears to clear be designed to protect the entire company from world ending loss... whether that was worth betting 8% of common equity on is another question... but it will protect them in a GD scenario, however unlikely.

Vinod, Yeah, as the contracts are marked to market each quarter, collateral is passed from one party to the other. There are many ways to mark (to model) the contracts, and I'm sure any bank selling these would value them more conservatively than Fairfax if times get rough so as to post as little collateral as reasonable (without being called out for having a lack of collateral to post...), but with each measurement period, the bank would have to post collateral to back the net change to Fairfax if the contracts start moving in Fairfax's favor. Certainly, a 40% deflation like the GD would be a long drawn out affair, but the valuation change in contracts like these would move slowly each quarter to suck collateral in from the IB to Fairfax. A 1 quarter valuation change + the difference in valuation methodology would be the only thing at risk even if Fairfax held the contracts for massive gains over 5 years (as an example only). Hope that helps.

These are collateralized contracts, so unless Citi goes under in one quarter, it seems nearly certain, they will in fact collect. Not defending the position itself, only the mechanics of posting collateral on a derivative contract... I would ascribe minute risk, and only to the last quarterly portion of value accrual.

Obtuse, They aren't buying puts. I don't think VIX / Vol really impacts the cost of TRS. The bigger factor in TRS is market liquidity and the size they are doing. Pretty sure you can get off a few hundred million in TRS shorts without needing to pay much premium beyond the implicit borrow rate of the underlying indices you are shorting. Not defending that shorting in Q1 was or was not a good idea, just clarifying that their positions aren't bad timing because of VIX, it's essentially irrelevant. -- Overall, results seemed ok. Their equity portfolio continues to really suck though into the new year...

Thanks Hamilton, I hadn't run the #'s here in a while, bigger than I thought. Appreciate you putting this down. 1) Tough to value the discount at face, and translate that back to a discount to book, but I'd say it's roughly right even though they can't repurchase at these prices. I think CA preferreds are probably trading cheap because of selling pressure beyond fundamentals (same with a lot of CA debt I look at) 2) They may, but I doubt they are going to do so soon. 3) I think yes, these are taxable gains on below par retirement (both debt and preferred) 4) Not sure, Fairfax calls everything a hedge. As a USD holder, it's probably a hedge, as a CAD holder, you may think it's a "bet"... ;-), I don't know exactly the right way to look at it. Thanks again. I need to run the #'s again here on the whole complex. I sold down a ton last spring, and built maybe halfway back in the fall... but portfolio performance has really been struggling... I hope they turn that corner because reinsurance prices are tanking it seems.

I saw the price on the headline of your note, and I basically thought everything you thought in your note... Seems decent, but not sure I would step into this at these prices... wouldn't be a bad bet though for sure.

The best way to think about IRR vs. TWRR is this, IMO: 1) IRR takes all inflows and outflows into account, and provides the effective (annual) rate of return which equates the present and future value of the cash flows (the effective annual rate). 2) TWRR is a cash flow neutral measure, so it weights the return of the underlying daily investment results equally, even if more or less money was invested on certain days of the measurement period. If you think about this, IRR is best used for the following: 1) Investors who control fully the inflows and outflows of money (I would argue, for a personal investor, with knowledge of what IRR means, this is the appropriate measure). 2) If you are an Advisor**, or HF or something and you don't control the timing of when *investors* give you money, TWRR is more appropriate measure as you want to separate manager skill vs. investors good / bad timing. There is a gray area here as perhaps some investors do indeed influence the timing of when their clients give them money. ** Note that some (most?) PE firms lock investor money into a strategy based on commitments, but don't measure their (IRR) returns until they "call" the money into the strategy. This effectively makes PE returns seem higher, but I think is fundamentally an incorrect way to measure returns as "locked" in money should be considered committed to the strategy. TWRR is very laborious to calculate. Regardless of the above, it should be noted that that IRR can't be used and compared directly to the returns of an index, because you don't normalize the timing of cashflows into that index in the same way (at least 99% of people don't)... if you have a very large account, and your cash inflows (or outflows) are small relative to the starting / ending value of the account(s) you are measuring, then it doesn't likely matter much. If your cash flows into your account are large as % of starting value, your IRR will be much more volatility in general around whatever return average you would effectively have reached. Hope my words conveyed the nuance here... I quote both returns to my clients, and I say basically that IRR is *their* return, and TWRR is *my* return... basically the best way to simplify it I have found...

I have several concerns regarding LUK's book value. First, there is $2.6 bn intangible and goodwill, which should be deducted from the $10 bn book value figure. Second, LUK's consolidated balance sheet inflated the book value, as it holds a few subsidiaries over 50% interest. I think GAAP's consolidation method is that if they hold over 50% interest, they will report 100% of the consolidated sub's balance sheet items, and then in the income statement, have one line that deducts the minority earnings. Therefore LUK's book value on the balance sheet is inflated. Without additional disclosure of the breakdowns, I could not figure out by how much it is inflated. Hi muscleman, gw and intangibles are all basically Jeffries and national beef. As for consolidation, I think you are confused on when consolidation is done, and also on the impact on net equity. Check the final page of my presentation. Breaks down tangible / gaap / my valuation for each segment. Some rounding errors, but captures what you would want to know imo. Move any q's over to LUK board. Sent from phone.

Leucadia National (LUK): http://www.remickcapital.com/files/LUK.pdf (report made a couple weeks back, prior to Q3 release) Cheap on an assets basis maybe 40%, and management is crazy good IMO.

I used tiered, and I almost always provide liquidity (I use limit non-marketable / passive limit orders usually), so my perspective likely won't answer your question directly. I would suggest though, that you simply turn on tiered for 2-3 months, and then measure your effective commission over the types of trades you actually execute and see what the fixed commission equivalent is. My guess if that tiered is best for most everyone.

This, or the trade will be cancelled (I've had 4-5 trades cancelled on stink bids / asks over the years... always the cancels were not to my benefit). Ben

They have lower overhead, and they do not treat margin loans as a profit center. They also do not extend margin calls in the traditional sense to lower their exposure - if you violate margin, they will close you out automatically that day I believe. If you step back and just look at the risk of lending against a diversified pool of liquid securities (making reasonable adjustments to not lend against certain classes of securities - high vol, rapid price incliners, low market cap, etc etc), the risk of lending against this with reasonable collateral coverage is pretty minimal. But yea, it's a brave new world out there.

Don't be a stranger around here Bsilly... you are missed...

yeah, I think the quarter will actually be so-so. bonds probably show maybe $200-300m in gains. equities look real bad, even with hedging. IRE, BBRY, EUROB, RFP, KW, IBM... I have to go down my list probably 15 deep before I get to something that dropped substantially less than market this Q. Pretty ugly. But I do agree with Dazel that despite my past comments about not being able to predict M-2-Model valuation adjustments in the CPI swaps, I think the move in 10 yr inflation break evens this Q from 2.2% to 1.5% is meaningful from a model standpoint, and should mark the value of those up a few hundred million. I don't know, hard to get excited about the Q. I had sold down a huge chunk of FFH earlier this year and I've built a little piece of it back recently. I think it's a good value, and I do think the insurance results will continue to flow which is still not appreciated... but I don't think a big portfolio (net) move is in the cards this quarter. I'd love to be wrong. :)

Scorpion, In 1984, BRK was around $2,000 / share. $45k was first hit in late 1997... so being at 1999 was 2-3 years of draw down, not 15.

thepupil, Basically the video has Eric Nutall from Sprott saying that futures R^2 to actual is ~1% [EDIT: For clarity I mean to "actual, future prices"...]. I'm not really sure what the takeaway is from that, since if you are an oil investor today, you should absolutely be looking at Oil companies, and futures and saying "do these diverge". I think your Prudhoe Bay short is exactly this case... clearly, "at strip", it's worth way less. How do hedge this? Buy the strip with proceeds from BPT and chill on the beach. Maybe strip is wrong, but who cares. I think buying Oil Cos requires to at least think about the strip. I think most super majors trade effectively above strip today, so if you are "bullish" on oil, it's probably best to buy the strip rather than XOM (or whatever) if that is available to you. This analysis is simplistic because many things will effect XOM or other oil co's cash flows (refining, services cost, any M&A they do during crisis, etc), but if you think oil is absolutely going to rise to $80 in 2 years, buying futures is an easy way to isolate your supposed edge.

Maybe it's LC, the market share calculation could be done a few days, but I don't think the comparisons to network effect companies at the end of the commentary would make you think TSLA personally...